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With everyone speculating about what will happen when TimesSelect (NYT) and Wall Street Journal Online (DJ) go free, it makes sense to check in on the last major wall-removal story: Time Warner's (TWX) AOL. Was AOL's move a good one? Or should it have hung on and watched its subscriber base slowly dribble away?

Answer: It was a good move. AOL certainly sacrificed some near-term cash flow, but, critically, it has retained (or replaced) the lost subscribers in the form of unique users. If AOL hadn't made its email available for free, meanwhile, it likely would have lost most of these subs forever. Also, even as AOL's subscription revenue plummeted, the company has preserved its cash flow, which is far more important.

What hasn't happened, which would have been nice, is that unique users and pageviews haven't swelled as the rest of the world learned that AOL is now free. This said, they also haven't collapsed, which was a distinct possibility (Why? Because each AOL "subscriber" represents more than one unique user, as there are usually multiple users in the same household. Also, in the old days, AOL subscribers generated far more pageviews-per-user than average uniques, because of the frequency with which they checked email. So the loss of each subscriber could theoretically have meant the loss of more than one unique and several multiples of average pageviews).

Let's put some numbers on this... (If you want to see the quarterly progression, percentage changes, and calculations, please check out this spreadsheet. It's online, so just a quick click and no downloads or worries about nasty Excel viruses.)

Subs. Over the past year, AOL has shed 7 million subscribers, approximately 3 million more than it would have lost if it had maintained the status quo. Importantly, the attrition rate has now returned to almost the pre-free rate (1 million a quarter), and the sub base is still a considerable 11 million.

Cash Flow. Thanks to big cost savings in marketing, sub retention, and network expenses, AOL managed to nearly preserve its pre-free subscriber cash flow (We estimate pre-free cash flow of about $400 million a quarter versus about $300 million now). The company will continue to shed subscribers, and most of the big cost savings have already been booked, but subscription revenue should continue to throw off at least $200 million a quarter for several quarters (We estimate the subscription profitability by assuming an operating profit percentage of 35% for the company's ad revenue, calculating the operating profit from ads, and then backing into the operating profit from subs. Please see the bottom of the spreadsheet)).

Users. Unique users have been relatively stable at about 110-115 million for the past year, despite the loss of 7 million subs. This suggests the subs who quit the paid service are sticking around.

Pageviews. Similarly, pageviews have stabilized and are now beginning to increase again (although most of the sharp gain in the last quarter was the result of a measurement-method change). This, too, suggests that subs are sticking around.

Of all the companies considering going free--i.e., NYT and WSJ--AOL certainly had the most to lose. And, for AOL, at least, pulling the wall down has turned out to be a good decision.

Source: AOL: A Mistake to Go Free?